By Denny Gulino

WASHINGTON (MNI) – The attempted manipulation of the international
Libor rates is “unacceptable” and the Fed alerted market regulators to
the problem, but it is too early to know what the ultimate cost or
solution will be, Federal Reserve Chairman Ben Bernanke said Tuesday.

Bernanke’s caution in his replies to several questions about the
Libor scandal, during his semiannual congressional appearance to report
on monetary policy developments, extended to all aspects of the issue,
including the extent to which rates were actually distorted.

The Fed chairman said the New York Fed is the primary regulator of
two of three U.S. banks that contributed Libor borrowing rates but said
he does not at this point know if they made the same attempts to distort
the outcome as Barclays admitted to.

“It’s actually an interesting question,” to the extent borrowers
were harmed or helped, Bernanke answered at one point. “Borrowers may
have benefited because Libor was underreported. We’ll probably find out
via a number of lawsuits that have been filed, and investigations.”

Bernanke continued, “I’m not defending it. I think it’s a major
problem for our financial system and for the confidence in the financial
system and we need to address it.”

With characteristic reserve, without mirroring the tone of outrage
of several of his questioners, Bernanke said of the chance of
manipulation, “It’s important that people know about it” but he added an
important qualification.

“I’m not sure we’d agree this was something that was unknown” at
the time, he said. “The financial press was full of stories about it.”
In fact, he said, “I think there was knowledge among more sophisticated
investors that this was a problem.”

Libor could be fixed or replaced as a lending benchmark as part of
“an international effort,” given it’s a creature of British banks, he
said.

“I think there’s broadly two approaches,” he said. “One would be to
fix Libor, to make changes to it, to increase the visibility, to reduce
the ability of individual banks or traders to affect the overall Libor
and to increase monitoring of the reporting process that is done.”

The other strategy, he said, “which many people are thinking about,
is going from what is essentially a reported rate to an observable
market rate as the index, and there are a number of possible candidates
that have been advanced that might ultimately replace Libor.”

Any replacement would “not be a simple one to make” since the word
“Libor” is specifically included in hundreds of thousands of contracts,
including a sizable portion of U.S. mortgages. “Libor,” Bernanke said,
“is very deeply ingrained in many contracts.”

Bernanke said many lawsuits and investigations will reveal more
about the extent of damage and bank involvement but the Fed is ready to
participate in a global settlement in the same way it helped impose an
industry-wide remedy on the mortgage servicers in the United States.

On the question that was key for some questioners, whether the Fed
did all it could to prevent or forestall Libor manipulation once it was
told about it four years ago, Bernanke drew a distinction, that the Fed
is a “safety and soundness” regulator, as opposed to the CFTC, SEC and
the UK’s Financial Services Authority that focus on fraudulent market
manipulation.

The New York Fed “informed the responsible authorities, the CFTC in
particular, very quickly,” Bernanke said. The New York Fed “made a
presentation to the president’s working group that included the SEC and
CFTC, provided supporting information as did the Board.”

“So the investigations took place, but they were taken up quite
quickly by — not the Fed, which is a safety and soundness regulator —
but by the authorities that had most direct responsibility for those
issues.”

The N.Y. Fed is “still investigating the situation itself. It is
digging up documents and the like,” Bernanke said. “I don’t know what
communications or conversations were had with the three U.S. banks that
were on the (Libor) panel but the actual enforcement actions were taken
by CFTC, SEC and FSA.”

Asked directly, “Do we know definitively that no U.S. banks were
guilty of the same manipulation?” Bernanke answered, “No, we don’t know
that.”

“Two banks have reported that they’ve been asked to disclose
information to the investigating agencies and so the robust process is
certainly underway,” Bernanke said. “The responsibility of the New York
Fed was to make sure the appropriate authorities had the information
which is what they did.”

The three U.S. participants for dollar-denominated Libor rates,
among 18 total, are J.P. Morgan, Citibank and Bank of America.

“The FSA is reviewing the LIBOR benchmark, and will be making
suggestions as to how to improve it,” CFTC Chairman Gary Gensler told
the Senate Committee on Agriculture earlier Tuesday.

“Moving forward, the CFTC stands ready to assist the FSA on its
review of LIBOR and how to best assure that LIBOR, or any alternative
benchmark that might emerge, is not susceptible to attempted
manipulation or false reporting,” he continued.

Gensler hinted a preference for benchmarks based on observable
transactions.

“If these key benchmarks are based on observable transactions,
borrowers, lenders and derivatives users around the globe all benefit,”
he said. “If these key benchmarks are not based on observable
transactions, I believe their integrity will continue to be subject to
question. And if these key benchmarks are not based on honest
submissions, we all lose.”

** MNI Washington Bureau: 202-371-2121 **

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